The appellant assessee had Challenged the order passed by the Commissioner of Income-tax (Appeals)

The assessee company filed statement/return of deduction of tax at source (TDS) in Form 27Q for for the relevant Assessment Year. The Income-tax Officer (TDS) (International Taxation) after examining Form 27Q issued intimation u/s 200A of the Income-tax Act, 1961 (the Act) Act”) determining short deduction of TDS and accordingly demand on account of short deduction of tax u/s 201 of the Act and on account of interest u/s 201(1A) of the Act was raised.

The assessee explained that it had deducted TDS at the rates applicable under the double taxation avoidance agreement (DTAA) with respective countries whereas the AO mechanically applied the rate of deduction in such cases to be 20% as prescribed under section 206AA of the Act because payees did not hold PAN in India.

The assessee contended that it had correctly deducted the withholding tax u/s 195 of the Act based on the rates of tax payable by such payees on the income of interest earned in India. The request of the assessee for rectification of the said order was rejected.

The Assessee took the matter in appeals to CITA who by the impugned orders rejected the appeal stating that Section 206 AA of the Act laid down that if PAN of the deductee is not available, tax will be deducted at the rates prescribed under the Act or at the rate of 20%, which is higher.

Hence, the assessee was before the Tribunal.

It was argued by the assessee that it had correctly deducted the withholding tax under section 195 of the Act for each of the quarters of the financial year under reference at the rates applicable to the non resident in India as per the provisions of the DTAA and Section 206AA of the Act cannot override section 90(2) of the Act.

The assesssee relied upon a number of judgments in its favour.

Thus the question was whether Section 206AA of the Act override the provisions of Section 90(2) of the Act and whether in cases of the payments made to nonresidents whether the tax has to be charged as per Section 206AA or as per the provisions of DTAA?

The Tribunal observed that as per the settled position of law, section 206AA of the Act does not override the provisions of Section 90(2) of the Act and that in the cases of payments made to non-residents, assessee correctly applied the rate of tax prescribed under the DTAAs and not as per Section 206 AA of the Act because the provisions of the DTAAs were more beneficial.

Accordingly, the Tribunal quashed the orders of the authorities below and directed the deletion of the tax demand relatable to difference between 20% and the actual tax rate on which tax was deducted by the assessee in terms of the relevant DTAAs.